NRG Energy, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filing dated August 3, 2017. NRG is an integrated power company with generation, wholesale trading, retail electricity, renewables and NRG Yield businesses. It reported approximately 31,000 MW of net generation capacity after GenOn’s deconsolidation.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $2.701bn | $2.248bn | $5.083bn | $4.907bn |
| Operating income | $343m | $163m | $382m | $495m |
| Continuing operations income/(loss) | $99m | ($163m) | ($70m) | ($220m) |
| Net loss attributable to NRG | ($626m) | ($271m) | ($790m) | ($189m) |
| Net loss per share | ($1.98) | ($0.61) | ($2.50) | ($0.37) |
Q2 discontinued operations accounted for a $741m net loss, including a $208m pre-tax loss on GenOn deconsolidation and other restructuring-related charges. For the six-month period, discontinued operations produced a $775m net loss.
Q2 gross margin was $1.289bn versus $1.316bn; economic gross margin was $1.252bn versus $1.372bn. For the first half, gross margin was $2.266bn versus $2.655bn and economic gross margin was $2.270bn versus $2.679bn. Economic gross margin is a non-GAAP measure and excludes, among other items, hedge mark-to-market and certain amortization.
For the six months, cash provided by continuing operations was $112m, compared with $880m in 2016; net cash from operating activities was $74m versus $811m. Capital expenditures were $542m, and net cash used in investing was $545m. Financing activities provided $18m. Cash, restricted cash and counterparty funds totaled $1.240bn at period-end, down $146m from the beginning of the year.
At June 30, cash and cash equivalents were $752m and total reported liquidity, excluding collateral received, was $2.718bn, including $1.497bn of credit-facility availability. Long-term debt and capital leases on the balance sheet were $15.842bn, with $1.042bn current; debt including current maturities before discounts and issuance costs was approximately $17.1bn. No cash borrowings were outstanding on NRG’s revolver. Stockholders’ equity was $3.483bn.
Material changes versus prior periods
- Revenue increased year over year, but the comparison was substantially affected by hedge mark-to-market movements. Q2 net mark-to-market results improved to a $59m gain from a $33m loss; the six-month change was a $39m gain versus a $60m gain.
- Operating income rose in Q2 but declined for the six-month period. Retail economic gross margin fell $24m in Q2 and $33m for the first half; generation economic gross margin fell $113m and $358m, respectively. Renewables economic gross margin improved $24m in Q2 and $21m in the first half.
- On June 14, GenOn entities filed for Chapter 11. NRG ceased consolidating GenOn and treated it as a discontinued operation, so historical periods were recast and post-deconsolidation results are not directly comparable with prior reported results.
- First-half operating cash flow decreased sharply, driven in part by collateral movements, working capital and lower operating income adjusted for non-cash items.
Outlook, management commentary, risks and unusual items
- NRG’s July 12 Transformation Plan targets $1.065bn of recurring annual savings and margin enhancement, $2.5bn–$4.0bn of net cash proceeds from asset sales, and a reduction in consolidated debt from approximately $19.5bn to $6.5bn. The company expects implementation by 2020, with significant completion by the end of 2018; it estimates $290m of one-time implementation costs and $370m of non-recurring working-capital improvements. These are targets, not assured outcomes.
- NRG expects $4.8bn–$6.3bn of excess cash to be available for allocation through 2020 after contemplated asset sales and achievement of a 3.0x net-debt-to-Adjusted-EBITDA target. It stated that comparable quarterly dividends of $0.03 per share were expected to continue for the foreseeable future, subject to capital, market, legal and contractual conditions.
- The GenOn restructuring agreement includes $261.3m of settlement consideration, net of amounts GenOn owes NRG; NRG also recorded a $119m pension liability and a $28m services credit. Court approval, plan confirmation and implementation are not assured. NRG may remain exposed to claims and other costs if the arrangement is not approved or completed.
- Other unusual items include a $41m impairment of the Bacliff project after termination of its purchase agreement; NRG notified the counterparty it was owed approximately $48m, including $10m in liquidated damages. Will County Unit 4 was expected to remain out of service until early 2018. NRG also recorded $22m of renewables impairment losses.
- Key risks include GenOn bankruptcy outcomes and litigation, execution of the Transformation Plan and asset sales, commodity prices and collateral requirements, generation outages, regulatory and environmental changes, and customer and counterparty credit risk. The filing reports $145m of counterparty exposure before collateral and $17m net exposure, while separately estimating $4.3bn of exposure under certain long-term agreements for the next five years.
- Management said disclosure controls were effective at quarter-end and reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Progress, timing, proceeds and costs of the Transformation Plan, including whether its debt-reduction and savings targets are achieved.
- Bankruptcy Court approval and completion of the GenOn restructuring, and the final cash, pension, services and litigation obligations to NRG.
- Underlying operating performance apart from hedge mark-to-market effects, particularly generation and retail economic gross margin.
- Cash generation, working-capital and collateral movements, available facility capacity, and debt maturities and refinancing requirements.
- Resolution and potential financial effects of the Bacliff dispute, outages, environmental requirements and material litigation.